2011-11 Related Party - Recognition and Measurement Responses

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November 14, 2011

Related Party Transactions — Recognition and Measurement

Issues PaperPSAB welcomes comments on all aspects of the Issues Paper.

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Name: Stuart Barr

Organization: Office of the Auditor General of Canada

E-mail: [email protected]

1. Considering the nature and extent of the issues, should a standard on related party transactions include guidance concerning recognition and measurement of related party transactions?

Yes, there is a need for specific guidance on recognition and measurement of related party transactions. Such guidance will help address an increasing number of accounting issues resulting from the specific inclusion of government organizations in the PSAS accounting framework and the fact that current guidance was originally designed for governments.

2. Do you agree that when there is a policy of central management of assets and liabilities, only the provider organization would recognize the assets and liabilities?

Centrally managed assets and liabilities should be analyzed against the definitions and recognition criteria contained in the conceptual framework to conclude on whether they should be recorded on the provider or recipient’s financial statements. Making this assessment is often a question of judgment and requires a careful analysis of different factors, including the facts and circumstances of the specific scenario. We therefore do not believe “central management” is the one and only factor to consider in making this assessment. Furthermore, central management can take different forms ranging from centralized logistical administration to centralized policy making, and finding a clear definition of this broad concept for accounting purpose would be a challenge in itself. Centrally-managed assets In the case of assets, one of the key characteristic of the definition is whether the entity controls access to the asset or to its future economic benefit. Assessing which entity meets this essential characteristic is often a question of judgment and while central management can be one of the factors considered, it should not be the only one. If we take for example a scenario where a government has legal ownership of an asset and is responsible to maintain it throughout its useful life, and the asset is solely used by a related government organization in its own operations. Based on a careful analysis of the specific circumstances, including the various terms and conditions stipulated in a contractual agreement between the two parties, one acceptable conclusion might be that the government organization controls access to the asset's future economic benefit during its useful life and as such, the asset should be recorded in the government organization's financial statements. Centrally-managed liabilities

In the case of liabilities, we question whether central management is the appropriate criterion to use in determining where centrally managed liabilities should be recorded. We disagree with paragraph 16 of the Issue Paper stating that “centrally managed liabilities are not present obligations of a recipient organization”. There are cases where it can be argued that individual government entities have a present obligation that should be reflected in their individual financial statements irrespective of the fact that the liability is centrally administered by their government. If a recipient can demonstrate that the three essential characteristics of liabilities (per PS1000.45) are met, then the liability belongs in its financial statements. According to PS1000.21, a reporting entity’s financial statements should provide information about the cost of using its economic resources in the delivery of services. Government appropriations received by an entity are an economic resource available to the entity. There are scenarios at the federal level where a government provides annual appropriations to entities to cover certain liabilities for which certain aspects are centrally managed. In these scenarios, liabilities should be recorded in the entity’s financial statements irrespective of the fact that the program might be centrally managed. This is especially true for certain employee future benefit programs. Recording such liabilities at the entity level will help users better understand future revenue (in this case, appropriation) requirements necessary to cover costs of operations, one of the users’ needs listed at PS1000.20(c). Let’s take as an example the federal government’s severance benefit plan that provides employees of participating entities an accumulating benefit payable upon termination or retirement based on years of service and end salary levels. This program is unfunded, meaning the government or participating entities do not make contributions to set assets aside to settle the plan’s liabilities. Instead, the federal government provides annual appropriations to individual entities to fund required payments under the plan for that year. While certain aspects of this liability are centrally managed, such as the establishment and management of the plan terms and the annual actuarial valuation required to measure the government’s liability in accordance with PS3255, a decision was made a number of years ago to have participating entities start recording annually their respective share of the severance liability. Prior to this change, the financial statements of a plan participant did not at all reflect the cost the entity incurs over the years as its employees render services and earn the right to the benefit. However, PS3255 is very clear for accumulating employee benefits that an obligation is created as employees render services. Given it is the entity that directly benefits from the employees’ services (and not the central agency managing the program) such a cost is a present obligation of the entity. Furthermore, in this specific case, the government gives entities appropriations to finance payments they make to employees under this plan. The entity is therefore using its economic resources (in this case future appropriations) to settle the liability. In this case, following the central management criteria proposed in the issue paper would lead to an inappropriate conclusion. The multiemployer pension plan example used in the issue paper is different from the above scenario and is not useful to demonstrate whether central management is the right criterion to determine what liabilities get recorded at the entity level. Multiemployer pension plans are typically funded plans and as such, participants make annual contributions using resources appropriated by the government and record an annual cost in their entity-level financial statements based on defined contribution accounting principles. In this case, similar to the severance liability example, the actuarial determination of the liability in accordance with PS3250 is centrally managed and centrally recorded. However, unlike the severance liability example, pension benefit payments and related actuarial risks are centrally managed/assumed by the government. Whether the excess of the actuarial pension liability over annual cash contributions made by participating entities is a liability of these entities can be a complex question. While PS3250 recognizes that a multiemployer plan has the characteristics of a defined benefit plan, an exemption from defined benefit accounting is provided for practical reasons, based on the presumption that sufficient information to follow the standards for defined benefit plans is normally not available. In this case, central management of the plan is the cause of insufficient information, which led to the exemption. While the defined benefit liability of the multiemployer pension plan is recorded by the central agency, individual participants do recognize in their financial statements a pension cost based on defined contribution accounting principles, which is settled out of the participant’s own resources (i.e. annual appropriations). The federal health and dental benefit plan for retired employees is another example of a centrally managed program. In this case, all benefits paid to retirees are the responsibility of the government without regard to which government entity the retired employee worked for. This is an example of a centrally managed liability that may belong in the government’s financial statements rather than at the entity level if a determining factor is the fact that individual entities will not be required to settle the obligation out of their own economic resources. Employee benefit costs financed through appropriations are considered liabilities of an entity, even though some employee benefits are centrally managed. Applying the central management criterion to employee benefits does not

always work in our view.

3. Do you agree that when there is a policy of decentralized management, the recipient organization would only recognize the assets and liabilities for which it is responsible?

As stated in our response to Question 2, central or decentralized management is not the one and only factor to consider in determining where an asset or liability belongs. Each asset and liability should be assessed against its essential characteristics contained in the conceptual framework.

4. Do you agree that if a related party transaction involves the transfer of an asset or liability, both the provider and recipient organization would recognize the transaction in their separate financial statements?

Yes, we agree that the transfer of an asset or a liability should be derecognized by the provider and recognized by the recipient as long as all the characteristics of the elements of financial statements are present from the recipient’s perspective. Where a transfer of an asset by a government to a related government organization is a government transfer in scope of PS3410, PSAB and the task force should consider how the new related party standard will interact with Section PS3410, which already addresses recognition and measurement for such transactions.

5. Do you agree that when a transaction involves the provision of services by one party to a related party and there is a policy of allocating costs:

(a) the provider organization accounts for the assets and liabilities and recognizes all revenues and expenses associated with the provision of a good or service on a gross basis; and

(b) the recipient organization would identify and report the expense at gross amounts in its separate financial statements?

Yes, we agree with this principle both from the provider and the recipient perspectives. To the extent that the services do not have to be paid for, the credit would be to a services-in-kind revenue account, and overall, the cost of service recorded would be countered by the in-kind benefit recorded.

6. Should contributed goods and services be recognized in separate financial statements and, if so, how should they be reported?

We assume that the difference between this scenario and the one addressed by Question 5 above is that here goods and services are contributed to a recipient without the existence of a cost allocation policy. We see merits in recognizing contributed goods and services in recipients’ financial statements to reflect all significant resources consumed by a recipient entity in delivering its mandate. We also support restricting the recognition of contributed goods and services to those used in the normal course of operations and which would otherwise have to be purchased. The recognition of an expense would be matched with an equivalent amount reflected as a revenue-in kind, resulting in no net impact on the annual surplus/deficit. The measurement of goods-in-kind or services-in-kind received is discussed in Question 7.

7. Should the standard on related party transactions include measurement standards? If so, should the standard adopt a similar approach to Section 3840, in that transactions would be reported at carrying amount unless they occur in the normal course of operations or have commercial substance?

Yes, we support the introduction of measurement standards for related parties to bring clarity and resolve inconsistent measurement approaches currently observed in practice partly due to the use of contradicting guidance found in the different secondary sources of GAAP. As mentioned above, while Canada has traditionally issued specific measurement guidance for related parties (Section 3840), there is no such guidance at the international level, where related party transactions are treated no differently than other arms-length transactions. We also see merits in using an approach based on Section 3840 to measure related party transactions and with the principle that unless there is a substantive change in the consolidated interest in the item transferred, the transferor’s

carrying amount should be used. The simplification of the process for preparing and presenting consolidated financial statements of government entities is another benefit of this approach.

GENERAL COMMENTS





November 14, 2011





Name: Melanie Joseph, CA, Senior Manager, National Accounting Standards

Organization: BDO Canada LLP



Yes, a standard on RP recognition and measurement would help provide useful guidance on how to account for such transactions. In particular, we disagree with the sentence in paragraph .10 which argues against the recognition of related party transactions because users of separate financial statements would be unable to rely on them as relevant information could be missing. This is not a relevant argument against implementing a recognition standard; on the contrary, a recognition standard would be more helpful to a user of separate financial statements to identify all transactions incurred including those between related parties.


Yes, we agree, by referring to the definition of an asset and liability according to PS.1000. If the definition of an asset is not met because the recipient organization does not control the future benefit, then no asset should be recorded by the recipient.


Yes, if the definition of an asset or liability is not met according to PS.1000, no asset or liability should be recorded.


Yes, this accurately reflects the substance of the transaction.




Yes, unless as mentioned in the analysis the provider is clearly acting as an agent, in which case net reporting would be acceptable. We believe that the accounting treatment for these types of transactions would be properly reflected by incorporating the guidance from EIC-123 Reporting Reveune Gross as a Principal Versus Net as an Agent.


Yes, we agree. Similarly to the accounting treatment for contributed goods and services for an NPO, we believe that contributed goods and services should be recorded at fair value unless fair value is not readily attainable, in which case simple disclosure would be sufficient. The reason for this is that often, it is difficult to determine the fair value because there is a lack of comparable services offered to unrelated third parties, where evidence of fair value can be more easily obtained.


Yes, we agree because currently entities already look to Section 3840 when determining how to account for related party transactions. We agree that this measurement standard would provide useful guidance and would be relevant for a user to understand. In addition to the measurement standard, we believe that a required disclosure in the financial statements should be the original cost or net book value. The reason for this is that for example, if an asset is transferred to a related company and the carrying amount is used, the original net book value may no longer be tracked by the separate entities but would be needed by a parent on consolidation.

GENERAL COMMENTS

None.


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Opérations entre apparentés — Comptabilisation et évaluation Document de réflexion

Le CCSP invite les intéressés à formuler des commentaires sur tous les aspects du document de réflexion. Ne restreignez pas vos réponses. Chaque boîte de texte acceptera l’intégralité

de vos commentaires. Vous pouvez sauvegarder le formulaire et l’envoyer, pour examen, à d’autres personnes de votre organisation avant de le soumettre.

Nom : Marie-Claude Lamarre

Organisation : Société de Transport de Montréal (STM)

Courriel : [email protected]

1. Compte tenu de la nature et de l'étendue des points soulevés, est-ce qu'une norme sur les opérations entre apparentés devrait comprendre des indications sur la comptabilisation et l'évaluation des opérations entre apparentés?

Oui. Comme il est indiqué au paragraphe .10 du document de réflexion, si les opérations entre apparentés ne sont pas comptabilisées, les utilisateurs des états financiers distincts ne pourront se fier à ces états puisqu'il pourrait y manquer des informations pertinentes. Le fait d'inclure de telles indications dans la norme nous fournira une base à laquelle nous référer pour déterminer comment comptabiliser et évaluer les divers types d'opérations entre apparentés et permettra des traitements uniformes pour toutes les entités.

2. Seriez-vous d'accord pour que, lorsqu'une politique de gestion centralisée des actifs et des passifs est en place, seule l'entité prestataire comptabilise les actifs et les passifs?

s/o, ne s'applique pas à notre situation.

3. Seriez-vous d'accord pour que, lorsqu'une politique de gestion décentralisée est en place, l'entité bénéficiaire comptabilise seulement les actifs et les passifs dont elle est responsable?


4. Seriez-vous d'accord pour que, si une opération entre apparentés donne lieu au transfert d'un actif ou d'un passif, l'entité prestataire et l'entité bénéficiaire comptabilisent toutes deux l'opération dans leurs états financiers distincts?

Oui. Cette approche est d'ailleurs en accord avec le chapitre SP 1100, tel qu'indiqué au paragraphe précédent le paragraphe .20 du document de réflexion (paragraphe non numéroté). Cette façon de procéder concorde avec nos pratiques actuelles.

5. Seriez-vous d'accord pour que, lorsqu'une opération donne lieu à la prestation de services par une partie à un apparenté et qu'une politique de répartition des coûts est en place :

a) l'entité prestataire comptabilise les actifs et les passifs, ainsi que le montant brut de la totalité des produits et des charges afférents à la prestation des biens ou des services;

b) l'entité bénéficiaire identifie les charges et les présente au montant brut dans ses états financiers distincts?

Oui, comme c'est le cas avec les opérations régulières (non apparentées) avec des tierces parties. Cette façon de faire aidera les utilisateurs à comprendre l'ensemble des activités de l'entité prestataire, tel qu'indiqué au paragraphe .23 du document de réflexion. Dans notre pratique actuelle, nous comptabilisons déjà les montants bruts plutôt que les montants nets.

6. Les apports de biens et de services devraient-ils être comptabilisés dans des états financiers distincts et, dans l'affirmative, comment devraient-ils être présentés?


7. La norme sur les opérations entre apparentés devrait-elle comprendre des normes d'évaluation? Dans l'affirmative, l'approche utilisée devrait-elle être similaire à celle du chapitre 3840, en ce sens que les opérations seraient présentées à la valeur comptable, à moins qu'elles ne soient conclues dans le cours normal des activités ou qu'elles ne présentent une substance commerciale?

Oui, la norme devrait comprendre des normes d'évaluation, comme nous l'avons mentionné à la question 1 ci-dessus. Selon nous, l'approche utilisée devrait être similaire à celle du chapitre 3840. Cette approche reflète notre pratique actuelle, selon laquelle nos opérations entre apparentés conclues dans le cours normal des activités sont comptabilisées à la juste valeur. Ce type d'opérations entre apparentés représente la quasi-totalité de nos transactions entre apparentés.

COMMENTAIRES GÉNÉRAUX :


Page 1 of 3

Wayne Morgan Office of the Auditor General of Alberta Edmonton, Alberta November 14, 2011 Tim Beauchamp, Director Public Sector Accounting 277 Wellington Street West Toronto, Ontario Dear Mr. Beauchamp, Our response to PSAB Related Party Transactions – Recognition and Measurement Issues Paper is below: 1. Considering the nature and extent of the issues, should a standard on related party transactions include guidance concerning recognition and measurement of related party transactions? Yes. The nature of the relationship between the entities, and common control within the government reporting entity, can lead to transactions whose purpose is to achieve a particular financial reporting result for a particular government organization. Current PSAB guidance is predicated on the elimination of unrealized gains/losses or similar balances at the consolidated level to produce government financial statements, without consideration on the reporting by individual units within the government reporting entity. Guidance is needed to ensure a consistent treatment of related party transactions by government organizations. 2. Do you agree that when there is a policy of central management of assets and liabilities, only the provider organization would recognize the assets and liabilities? We agree that assets and liabilities should be recognized by the provider organization, as it will have the budget/spending authority related to these items and is appropriately accountable for their management. While recognition by the service provider would lead to incomplete recognition of program expenses by recipient organizations, this could be addressed through disclosures in the recipient’s financial statements. 3. Do you agree that when there is a policy of decentralized management, the recipient organization would only recognize the assets and liabilities for which it is responsible?

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We agree. Organizations should recognize the assets and liabilities, and related expenses, for which they are responsible. The presumption appears to be that entities would only acquire assets or incur liabilities which relate to their areas of program responsibility. However, due to common control, government organizations may undertake transactions that they would not have undertaken if they were autonomous. Also, as a result of reorganization of government responsibilities, entities may retain responsibility for management of assets that are in use solely to support programs of another entity. It does not appear necessary to make a distinction between central or decentralized management so much as ensuring those organizations that are responsible for managing assets and liabilities (and have the relevant budget and spending authority for related expenses) are accountable for these activities and therefore recognize those assets and liabilities in their financial statements. 4. Do you agree that if a related party transaction involves the transfer of an asset or liability, both the provider and recipient organization would recognize the transaction in their separate financial statements? We agree. However, current PSAB standards are directed primarily to the production of government financial statements, with elimination of unrealized gains/losses on transfers between entities within the reporting entity. Guidance will be required on how these transfers should be recognized, including how the nature of the related party transaction should impact the application of standards for government transfers in PS 3410. 5. Do you agree that when a transaction involves the provision of services by one party to a related party and there is a policy of allocating costs: (a) the provider organization accounts for the assets and liabilities and recognizes all revenues and expenses associated with the provision of a good or service on a gross basis; and (b) the recipient organization would identify and report the expense at gross amounts in its separate financial statements? We agree that providers should recognize the cost of the services they provide on a gross basis. 6. Should contributed goods and services be recognized in separate financial statements and, if so, how should they be reported? Yes, we agree that contributed goods and services should be valued and reported in separate financial statements. While we support recognition of assets and liabilities (and related expenses) by other organizations that have been assigned responsibility for their management, this can lead to incomplete reporting of program costs by recipient organizations. This can be

Page 3 of 3

addressed through disclosure in the financial statements. For example, a schedule to the financial statements could present the expenses incurred by the organization, classified by significant programs/activities, plus allocated costs incurred by others for services provided to the organization. These amounts could be added together to produce a total cost for each identified program/activity. While PSAB standards for government are silent on the valuation of contributed services, section 4210 provides useful criteria for when and how to value contributed goods or services. As well, the concept of “when reasonably measurable” should be applied. 7. Should the standard on related party transactions include measurement standards? If so, should the standard adopt a similar approach to Section 3840, in that transactions would be reported at carrying amount unless they occur in the normal course of operations or have commercial substance?

Yes, the standard for related party transactions should include measurement standards. As discussed in response to question #1, PSAB standards provide limited guidance for the treatment of transfers within the government reporting entity as the resulting gains/losses will be eliminated on consolidation. Without specific guidance from PSAB, it is not clear which other reporting standards should be followed.

It is not appropriate to inflate the value of the good or service over carrying value when the goods/services have not left the overall government reporting entity – the continuity of interest concept should apply. The standard should provide guidance similar to Section 3840, recording transactions at carrying value unless they are clearly monetary transactions occurring in the normal course of operations or have commercial substance.

Thank you for the opportunity to comment.

Sincerely,

Wayne Morgan, PhD, CA, CISA


Formulaire de réponse Pour être pris en considération, les commentaires

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Opérations entre apparentés — Comptabilisation et évaluation Document de réflexion

Le CCSP invite les intéressés à formuler des commentaires sur tous les aspects du document de réflexion. Ne restreignez pas vos réponses. Chaque boîte de texte acceptera l’intégralité

de vos commentaires. Vous pouvez sauvegarder le formulaire et l’envoyer, pour examen, à d’autres personnes de votre organisation avant de le soumettre.

Nom : Simon-Pierre Falardeau, CA, Contrôleur des finances et André Miville, CA, directeur général de la pratique professionnelle

Organisation : Contrôleur des finances - Québec

Courriel : [email protected] et [email protected]

1. Compte tenu de la nature et de l'étendue des points soulevés, est-ce qu'une norme sur les opérations entre apparentés devrait comprendre des indications sur la comptabilisation et l'évaluation des opérations entre apparentés?

À notre avis, la nouvelle norme devrait comprendre des indications sur la comptabilisation et l'évaluation des opérations entre apparentés puisqu'elles apporteraient des précisions et de l'uniformisation quant à leur traitement comptable. Par exemple, les transferts d'immobilisations entre entités apparentées entraînent un traitement comptable différent pour le bénéficiaire et le cédant. En effet, en vertu du paragraphe SP 3410.14, le cédant constate le transfert à la valeur nette comptable alors que pour le bénéficiaire, le paragraphe SP 3150.14 stipule que les immobilisations reçues à titre d'apport doivent être constatées à la juste valeur. Lors de la consolidation des états financiers de ces entités, le gouvernement doit ainsi annuler une transaction enregistrée à des valeurs différentes dans les livres du bénéficiaire et du cédant. Cela oblige à effectuer un suivi annuel de la portion de l'amortissement à annuler (dans le cas où la juste valeur est supérieure à la valeur nette comptable).

2. Seriez-vous d'accord pour que, lorsqu'une politique de gestion centralisée des actifs et des passifs est en place, seule l'entité prestataire comptabilise les actifs et les passifs?

Cette méthode de comptabilisation est présentement utilisée par les entités incluses au périmètre comptable du gouvernement pour la comptabilisation du coût des régimes de retraite des employés gouvernementaux. Voici un exemple qui existe présentement dans le cas des immobilisations détenues par une entité centrale. L'entité propriétaire d'un immeuble loue celui-ci à une autre entité faisant partie du périmètre comptable. Selon les conditions du bail, l'entité qui loue l'immeuble peut devoir comptabiliser un contrat de location acquisition. Nous sommes d'avis que seule l,entité prestataire doit comptabiliser les actifs et passifs dans certaines circonstances mais le le document de réflexion devrait être plus explicite sur le traitement comptable privilégié dans es situations.

3. Seriez-vous d'accord pour que, lorsqu'une politique de gestion décentralisée est en place, l'entité bénéficiaire comptabilise seulement les actifs et les passifs dont elle est responsable?

Nous sommes d'avis que le CCSP devrait clarifier le contenu de ces paragraphes. Dans les cas où il existe une gestion décentralisée, il est difficile de cerner la façon dont les liens entre apparentés interviennent ou ce que le CCSP veut exprimer par le paragraphe .19.

4. Seriez-vous d'accord pour que, si une opération entre apparentés donne lieu au transfert d'un actif ou d'un passif, l'entité prestataire et l'entité bénéficiaire comptabilisent toutes deux l'opération dans leurs états financiers distincts?

Nous sommes d'accord avec cette proposition. Au gouvernement du Québec, les transactions impliquant le transfert de propriété d'actifs et de passifs sont comptabilisés dans chacune des entités faisant partie du périmètre comptable du gouvernement. Les gains et les pertes, le cas échéant, sont éliminés lors du processus de consolidation des états financiers du gouvernement.

5. Seriez-vous d'accord pour que, lorsqu'une opération donne lieu à la prestation de services par une partie à un apparenté et qu'une politique de répartition des coûts est en place :

a) l'entité prestataire comptabilise les actifs et les passifs, ainsi que le montant brut de la totalité des produits et des charges afférents à la prestation des biens ou des services;

b) l'entité bénéficiaire identifie les charges et les présente au montant brut dans ses états financiers distincts?

A notre avis, les coûts de la prestation de service devrait être comptabilisé en fonction des coûts net assumé par chacune des entités apparentées que celui-ci soit bénéficiaire ou prestataire . Par exemple, lors d'un "prêt" d'employé, l'entité prestataire de service serait celle qui est en lien d'emploi avec l'employé. Pour le prestataire, la comptabilisation de la prestation de service au brut entraînerait nécessairement un revenu lors d'un remboursement du coût du service . Nous sommes d'avis que ce traitement comptable serait inappropriée puisque l'objectif de cette transaction entre apparenté est davantage en lien avec le partage d'une ressource gouvernementale que la prestation d'un service à l'entité bénéficiaire.

6. Les apports de biens et de services devraient-ils être comptabilisés dans des états financiers distincts et, dans l'affirmative, comment devraient-ils être présentés?

Selon nous, seuls les apports de biens entre apparentés devraient être comptabilisés à la valeur comptable des actifs transférés que l'apport d'actif soit avec ou sans contrepartie. Et ce, afin de faciliter le travail d'élimination de ces opérations lors de la consolidation des états financiers du gouvernement. Pour les apports de services, donc sans contrepartie, il est souvent difficile de les évaluer au prix d'un effort raisonnable. De plus, la comptabilisation de ces apports gonfle indûment les revenus et les dépenses. Pour les apports de services, nous suggérons la divulgation par voie de note de la nature des transactions effectuées.

7. La norme sur les opérations entre apparentés devrait-elle comprendre des normes d'évaluation? Dans l'affirmative, l'approche utilisée devrait-elle être similaire à celle du chapitre 3840, en ce sens que les opérations seraient présentées à la valeur comptable, à moins qu'elles ne soient conclues dans le cours normal des activités ou qu'elles ne présentent une substance commerciale?

Nous sommes d'accord avec l'intégration de directives d'évaluation dans la norme sur les opérations entre apparentés. L'approche du chapitre 3840 du secteur privé devrait être retenue car lorsque des opérations sont conclues dans le cours normal des activités, nous sommes d'avis qu'elles devraient être comptabilisées à la valeur d'échange convenue entre les parties.

Il est cependant très important que le CCSP définisse clairement ce qu'est le cours normal des activités. Nous suggérons que le cours normal des activités soit constitué par les achats ou ventes de biens ou de services faisant partie de la mission intrinsèque de l'entité.

COMMENTAIRES GÉNÉRAUX :





November 14, 2011





Name: Ron Williams, CA (Comptroller General of Finance)

Organization: Government of Newfoundland and Labrador



No, it is not considered necessary to include guidance on recognition and measurement of related party transactions. In fact, accounting standards should not impact how governments are organized, its accountability structures or budgetary practices. As such, it is not supported that accounting standard setters should be providing guidance on how a government allocates costs and revenues as these are the result of the structure and policy initiatives that are particular to each jurisdiction. The Province of Newfoundland and Labrador does not view the departments as being separate "entities" but rather combined collectively within the Consolidated Revenue Fund (CRF) and generally does not record charges for services between departments. In cases where there is an interdepartmental provision of services, those services are considered cost recoveries. As a result, it is our position that a public sector entity should not be required by accounting standards to recognize transactions in its financial statements were an entity does not pay for goods and services or allocate such costs incurred in central agencies of the operations if it is not apart of of its enabling legislation or policies. Any guidance that is issued by the PSAB should be issued as an Statement of Recommended Principle (SORP). It should be limited to disclosure of related party outside the normal course of operations at the most as this is considered adequate information for financial statement users in assessing the reporting entity. Further, for any entity preparing separate financial statements, there should be adequate guidance in other sections of the handbook regarding the recognition and measurement of transactions that can also be applied to transactions with related parties.


From the financial reporting perspective, the financial statements prepared by the Province of Newfoundland and Labrador(the Consolidated Revenue Fund and the Consolidated Summary Financial Statements), there is no allocation of assets and liabilities from a central management perspective. Ultimately, the Province would recognize assets and liabilities when an item satisfies the definitions and meets the recognition criteria. Government would control the economic resources from which future economic benefits are expected to be obtained. In the case of government entities, it would be assumed that the organization that controls the assets and are responsible for the liabilities would recognize them.


As mentioned in response to question two above, there is no allocation of assets and liabilities from a financial reporting perspective within the statements prepared by the Province of Newfoundland and Labrador. However, in a manner similar to that identified in relation to the policy of central management of assets and liabilities, the Province would recognize assets and liabilities when an item satisfies the definitions and meets the recognition criteria as per the PSA Handbook.


Again, as noted in response to questions two and three above, related parties to a transaction would each recognize a transaction in their separate financial statements based on the substance of the transaction and if it meets the appropriate definitions and recognition criteria in relation to the transaction. Consideration would also be given to the entity's policies regarding particular transactions.




No, in treatment in such cases depends on the polices and mandates of the entities involved, this is not an aspect that should be dictated by PSA Standards but rather determined by each jurisdiction. For example it may be a policy of a certain government agency to treat certain services provided to other entities as cost recoveries and as such netting would be appropriate .


No, contributed goods and services should not be recognized in separate financial statements. Governments often establish that certain activities are to be performed by central agencies or departments (i.e., pension management, purchasing) to improve internal processes and achieve efficiencies. It is not appropriate to recognize these costs or benefits in separate financial statements as they do not control the related assets or obligations.


No, any guidance on related party transactions should not include measurement. Such transactions should be reported at the value determined by government policy or the related parties unless there is a specific existing standard in the PSA handbook how particular transactions should be measured.

GENERAL COMMENTS





November 14, 2011





Name: Greg MacBeth

Organization: Office of the Auditor General of Manitoba



Yes.


No. Excluding certain costs and liabilities (pension liability for example) would not reflect all costs and liabilities of the entity.


Yes


Yes and the transactions would be measured in accordance with the measurement standards in question #7.




Yes


Yes if they can be reliably measured.


Yes

GENERAL COMMENTS

I am replying on behalf of the Office of the Auditor General of Manitoba. My comments are from the perspective of the public sector within our jurisdiction.


November 30, 2011

Tim Beauchamp

Director, Public Sector Accounting

277 Wellington Street West

Toronto, Ontario M5V 3H2

Dear Mr. Beauchamp,

RE: Related Party Transactions – Recognition and Measurement Issues Paper

Thank you for the opportunity to provide comments on the Related Party Transactions –

Recognition and Measurement Issues Paper. We have presented our response in a format

consistent with the questions posed.

1. Considering the nature and extent of the issues, should a standard on related party transactions

include guidance concerning recognition and measurement of related party transactions?

Yes. A standard is needed to ensure related party transactions are treated consistently from one

entity using the PSA framework to the next. There are presumably three potential amounts that

one can use to measure a related party transaction: exchange value, carrying value, and fair

value. A standard is needed to decide when each of these potential measurement bases is most

appropriate.

2. Do you agree that when there is a policy of central management of assets and liabilities, only the

provider organization would recognize the assets and liabilities?

Yes.

3. Do you agree that when there is a policy of decentralized management, the recipient

organization would only recognize the assets and liabilities for which it is responsible?

Yes.

PO Box 187

1723 Hollis Street

Halifax, NS B3J 2N3

(902) 424-2079

[email protected]

Department of Finance Government Accounting

4. Do you agree that if a related party transaction involves the transfer of an asset or liability,

both the provider and recipient organization would recognize the transaction in their separate

financial statements?

Yes.

5. Do you agree that when a transaction involves the provision of services by one party to a related

party and there is a policy of allocating costs:

(a) the provider organization accounts for the assets and liabilities and recognizes all

revenues and expenses associated with the provision of a good or service on a gross

basis; and

Yes, to the extent that the provider is a principal rather than an agent.

(b) the recipient organization would identify and report the expense at gross amounts in its

separate financial statements?

Yes.

6. Should contributed goods and services be recognized in separate financial statements and, if so,

how should they be reported?

Not if the contribution is within the normal course of operations. If the transfer is in the normal

course of operations, the zero dollar exchange value should be used. If the contribution is outside the

normal course of operations, it should be recorded by both parties at the transferor’s carrying value.

The Issues Paper proposes to include guidance similar to that found in NPO standards (i.e., an entity

can record the transaction at FV if it would have been purchased externally). However, , giving the

“option” of recording at FV could lead to financial statement manipulation and inconsistencies from

one entity to the next.

The above argument is not meant to apply to non-reciprocal TCA transfers between related parties. It

is assumed that the provisions of PS 3150 (for recipients) and PS 3410 (for transferors) would take

precedence over any related party standard in these types of scenarios.

7. Should the standard on related party transactions include measurement standards? If so,

should the standard adopt a similar approach to Section 3840, in that transactions would be

reported at carrying amount unless they occur in the normal course of operations or have

commercial substance?

Yes, measurement standards should be included. Criteria similar to those used in Section 3840

should be maintained but adjusted for any concepts not applicable to the public sector.

This concludes our thoughts on the Related Party Transactions – Recognition and Measurement

Issues Paper. We would be pleased to discuss any questions or comments you may have with respect

to this letter. To do so, please contact Jill Devanney ([email protected]) or Rob Bourgeois

([email protected]).

Regards,

Robert E. Bourgeois, CA

Director, Financial Accounting

Nova Scotia Department of Finance

Finance Comptroller’s Division Comptroller’s Office 715 – 401 York Avenue Winnipeg, Manitoba R3C 0P8 Phone: 945-4919 Fax: 948-3539 E-mail: [email protected] November 30th, 2011 Mr. Tim Beauchamp, Director Public Sector Accounting 277 Wellington Street West Toronto, Ontario M5V 3H2 Dear Mr. Beauchamp:

Re: Invitation to Comment: Related Party Transactions – Definition and Disclosure; Issue Paper: Related Party Transactions – Recognition and Measurement

Thank you for the opportunity to comment on these two documents. The Province of Manitoba (Province) has included responses to the Board’s specific questions, in the attached appendices. In general the Province views the definition of related parties as being too broadly scoped. According to PSAB’s definition, related parties include the close family members of key management personnel of a public reporting entity. Close family members include spouses, grandparents, parents, children, brothers and sisters and their spouses. It is unrealistic to expect any public reporting entity to be able to identify a complete list of their related parties if close family members, and the entities which they also control or hold an economic interest, are included. We appreciate the opportunity to comment on these two documents on related parties. If you have any questions or concerns related to this comments please contact the undersigned. Yours truly, Betty-Anne Pratt, CA Provincial Comptroller On Behalf of the Province of Manitoba

Appendix B

Issue Paper: Related Party Transactions Recognition and Measurement

1. Considering the nature and extent of the issues, should a standard on related party transactions

include guidance concerning recognition and measurement of related party transactions?

Given the nature and extent of related party transactions the Province agrees that a new standard should include guidance on the recognition and measurement of related party transactions. It is notable that related parties within the government reporting entity are currently using different accounting treatments for contributed services from the core government. Some controlled entities are recording contributed services at the carrying value while others are recognizing the transaction but have chosen not to measure it. This makes it impossible to perform meaningful evaluations between different related parties.

2. Do you agree that when there is a policy of central management of assets and liabilities, only

the provider organization would recognize the assets and liabilities?

The Province agrees where there is a policy of centralized management only the provider organization would recognize the assets and liabilities.


The Province agrees that where there is a policy of decentralized management, the recipient would only recognize the assets and liabilities for which it is responsible.

4. Do you agree that if a related party transaction involves the transfer of an asset or liability,

both the provider and recipient organization would recognize the transaction in their separate financial statements?

The Province agrees that if a related party transaction involves the transfer of an asset or liability then both the provider and recipient should record the transaction in their separate financial statements.

5. Do you agree that when a transaction involves the provision of services by one party to a

related party and there is a policy of allocating costs:


(b) the recipient organization would identify and report the expense at gross amounts in

its separate financial statements? The Province agrees that when there is a policy of allocating cost the gross accounting concept should be followed. All revenues and expenses by the provider organization should be reported at a gross basis while the recipient should also report the expense on a gross basis.

Page 6 of 6


Contributed goods and services should be measured at carrying value unless the fair value can be reasonably estimated and the goods and services are used in the normal course of the entity’s operations.

7. Should the standard on related party transactions include measurement standards? If so, should

the standard adopt a similar approach to Section 3840, in that transactions would be reported at carrying amount unless they occur in the normal course of operations or have commercial substance? A standard on related party transactions should include guidance on measurement. Related party transactions should be measured at carrying value unless the transaction occurs in the normal course of business or has commercial substance.




November 14, 2011





Name: Gisele Simard

Organization: Alberta Treasury Board and Enterprise



No. In most governments, recognition and measurement of related party transactions is a matter of legislation, accountability structure, budgeting practices and the mandates of the entities involved. In Alberta, for example, some services are provided and budgeted centrally without charging the recipient entities; whereas at the same time some services are charged to the recipient entities. There are also situations that the cost of services provided by a service provider is transferred to the service recipients by reducing the cost of service provider and increasing the expense of service recipient. The financial statements of the entities concerned reflect the related accountability structures and budgeting practices. These practices have been determined by the decision makers and the legislators as the most appropriate method to report on accountability. Accounting should report on accountability and should not dictate the mode of accountability.


No. This appears to be the prevalent practice in most jurisdictions. However, there should not be anything to prevent a government from adopting a different approach (or a combination of approaches).


No. Again, this appears to be the prevalent approach in most jurisdictions. However, circumstances and accountability factors in a particular jurisdictions , may justify other approaches as more appropriate.


No. In governments, transfers of assets and liabilities among various entities take place under 3 scenarios: 1. In the ordinary course of operations. 2. As a result of government restructuring and reorganization, and 3. Non-monetary transactions, with or without commercial substance. It appears that there is no consistency of treatment across various jurisdictions in dealing with the above types of

transactions.




No. There are situations that based on a government's policy, cost allocation among various entities takes place on the basis of a shared cost assumption. Under this policy, the service providing entity transfers the related cost of each service recipient to them. As a result, the service provider only recognizes the unallocated cost and the service recipients recognize their portion of the total costs in their financial statements.


No. Recognition of goods and services should be a policy matter. PSAB may provide some guidance for situations where a government decides to recognize contributed goods and services


No. Basis of reporting on transactions between public sector entities should be a matter of the accountability structures, government policies and budgeting practices. With respect to transfer of assets, there is already some guidance in place in sections PS 3150 and PS 3410. Because of the continuity of interest and the fact that essentially there is no substantive change in the ownership of assets concerned, the current practice of measurement at carrying amount appears to be the most cost efficient approach.

GENERAL COMMENTS

None. Thank you for the opportunity to comment.





November 14, 2011





Name: Brian Jones, Executive Director, Professional Practices

Organization: Office of the Auditor General of BC



On balance we believe there is merit to including some limited guidance concerning recognition and measurement in the standard, however caution should be exercised as to the nature, extent and specificity of such guidance such that it minimizes speculation that might arise in the recognition/measurement process with such transactions. For the most part, robust disclosures that draw attention of users to the possible affect of related transactions to an entity's financial statements should be sufficient for users in assessing an organization's performance and financial position.


We agree that only the provider organization would recognize the assets (and liabilities) in circumstances where there is a policy of central management and it is clear that the provider organization assumes the benefits and risks associated with the assets (or it is clear that centrally managed liabilities are present obligations of the provider organization). However, there are circumstances in the public sector where centrally managed assets (or responsibility for a liability) resides with the recipient organization (e.g., certain non-pension employee benefits), so the Section needs to allow for these circumstances as well.


Yes, we agree that the recipient organization would recognize only the assets and liabilities for which it is responsible and satisfies the definitions and recognition criteria.


Yes, we agree that both the provider and the recipient organization would recognize an asset/liability transfer in their separate financial statements. However, transfers of this nature are within the scope of Section PS 3410 (transferring government) and PS 3150 (recipient), so there is a need to consider how a new related party transaction standard would interact with these sections.




Yes, we agree with accounting for provision of service transactions on a gross basis since, as suggested in the Issues Paper, this helps users understand the full extent of the providing organizations's operations and the full cost-of-service for the recipient organization.


Our view is that contributed/donated goods and services should be recognized in an entity's financial statements to ensure that full cost-of-service is provided. However, the recognition of such should be restricted to goods and services used in the normal course of operations and would otherwise have to be purchased by the recipient entity.


We are not convinced that measurement standards are appropriate for a related party transaction standard, particularly if robust disclosure requirements provide users with the information they require to understand the impact of such transactions. While we understand the view that related party transactions should be adjusted, where necessary, to prices that would be equivalent to those that would be arrived at between arm's-length parties, this may be very difficult to achieve with any precision for many types of transactions in the public sector. Also, the possibility would remain that without the existence of related parties, different transactions might have taken place, or a transaction might not have occurred. It would be very speculative to make adjustments of this nature which may have a larger impact on the entity than a difference that might exist between a related party exchange value and an arm's-length fair value. However, in the event that there is consensus to include measurement standards, the approach taken in Section 3840 to measure transactions at carrying amount if they do not occur in the normal course of operations or have commercial substance appears reasonable to us as it minimizes the speculation inherent in alternative measurement basis, such as exchange amounts or fair values.

GENERAL COMMENTS


Documents

2011-11 Related Party - Recognition and Measurement Responses